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In 2005 I became a landlord. A good friend and I began investing in single family homes in the midwest. We purchased two HUD foreclosures in 2005, and since then we’ve added 3 more HUD foreclosures to our portfolio, and then sold two homes.

When we advertise one of our homes for rent, we always advertise the property as a rent-to-own home. Also called a lease option, we structure the agreement to allow the tenants to purchase the home within a specified period of time for a set price.

We’ve entered into several lease-to-own agreements with tenants, although we’ve only sold one of the homes to a tenant (more about that in a minute). This experience has taught me two things: (1) tenants make major mistakes when entering into a lease purchase agreement, and (2) some landlords take advantage of tenants who don’t understand how to approach a contract for a rent-to-own house.

For a time, when mortgage loans were easier to access, rent-to-own real estate fell by the wayside. Now, though, such arrangements are making a comeback. Renting to own can help potential home buyers get into a home before they save up a down payment. However, it’s easy to make a mistake in this arrangement, so we’ll talk here about how to negotiate a fair lease option and how to identify potential traps.

Here are the topics we will cover:

  • Lease Options 101: A summary of a lease option, and points to consider when deciding whether a rent to own home is right for you.
  • Treat a Lease Option Like a Purchase: Although there is no obligation to purchase a home during the term of the option, tenants should enter the deal as if they are buying a home.
  • Key Lease Option Terms: A review of the following key terms–
    • Rental Agreement
    • Lease Option Fee (the 1% rule)
    • Term
    • Rent Credit (the 15% rule)
    • Maintenance Obligations
    • Purchase Price
  • Financing a Rent-to-Own Purchase
  • $8,000 Tax Credit

Lease Options 101

A lease option, lease purchase, or rent-to-own home involves two agreements: a rental agreement and an option to purchase the property.

The rental agreement in most respects is a standard landlord-tenant agreement to rent the property at an agreed-upon price for an agreed-upon term. The option gives the tenant the right to purchase the property within an agreed-upon time frame (typically one to three years) at an agreed-upon price.

There are several reasons why a lease option may be an attractive way to buy a home. First, lease options appeal to those who do not have enough money for a down payment. Through rent credits (see below), a tenant can accumulate cash that goes toward the down payment. In addition, during the rental period, the tenant can save money above and beyond the rent credit to put toward the house.

Learn More: What Credit Score Do You Actually Need to Buy a Home?

Second, for those who have a low credit score, they can work to improve their FICO score during the rental term. This can help them get better mortgage rates and terms once they’re eventually ready to buy.

And, finally, a rent to own home gives tenants an opportunity to live in the home and get to know neighbors before committing to the purchase.

Of course, you don’t have to rent a home with an option to buy to accomplish all of this. You can just rent a home in a neighborhood that interests you, save a down payment while you rent, and work to repair your credit score. But for those who do enter into a lease purchase, the above reasons are generally why.

Treat a Lease Purchase Like You’re Buying the Home

Before we look at the key terms, there is one very important consideration to keep in mind: you should treat a lease purchase property as if you are buying the home.

It amazes me how some people will put down a lease option fee and enter into a 3-year contract having spent 10 minutes in the home. Almost without fail, these people do not exercise the option to buy the home. Instead they move on to another lease option deal somewhere else.

Should You Rent a Home or Buy One?

The goal of a lease purchase should be that you eventually buy the home. While intervening events may cause you not to exercise the option, you should treat the transaction as if you will. So, what does this mean?

First, you should inspect the home as you would with a purchase. Whether you hire a home inspector, have a friend or family member look at the home, or inspect the home yourself, you should look over the home as if you were going to sign a purchase agreement.

Second, look for a home you actually want to own. Often tenants enter into a lease purchase agreement because the home happens to be available, not because it’s a home they truly want to own.

And finally, negotiate all the terms of the deal as if it were a purchase. And with that, let’s look at the key terms of a lease option.

Key Lease Option Terms

Here are a few key terms you should be familiar with before ever considering a rent-to-own situation.

Rental Agreement

A lease option is, first and foremost, a rental agreement. The key terms in any rental agreement are the rent and the term. In these deals, however, there are two key points to remember.

Related: How to Get Your Credit Score for Free

First, the rent should be whatever reasonable market rent the home justifies. The rent should not be higher because of the lease option component of the deal. Remember, you’ll be paying an option fee, which covers the value of your right to purchase the home. The rent is the rent. I’ve heard horror stories of tenants agreeing to outrageous rents because the landlord convinced them it was justified in light of the lease option.

Second, the term of the option should give you enough time to save up a down payment and repair your credit. If you know this will take two or three years, a one-year option is a waste of time and money.

If you are not sure how long it will take you to qualify for a loan, talk to a mortgage broker before entering the deal. They should be able to give you some idea of how long it will take to get your finances in order to qualify for a home mortgage. Generally, terms of two to three years are common for rent-to-own single family homes… at least they are where we invest.

Lease Option Fee (the 1% rule)

The lease option fee is the cost of the option to purchase the home. The option lasts for the length of the rental term, typically. In other words, if the rental term is three years, the option gives you the right, but not the obligation, to purchase the home anytime during those three years. When you negotiate the option fee, keep three key factors in mind:

  • The amount of the option fee (about 1% of purchase price)
  • Whether the fee is refundable (generally, no)
  • Whether the fee applies to the purchase of the home (generally, yes)

First, of course, is the amount of the fee. As a rule of thumb, 1% of the purchase price of the home is reasonable. The homes we rent range in value from about $130,000 to $175,000. The option fees we charge generally range between $1,450 and $1,950, which is slightly higher than 1%.

What I Learned from Flipping Real Estate (and Why I’ll Never Do It Again)

However, we do not require tenants to put down a security deposit on a lease purchase deal. I’ve seen landlords ask for and get option fees as high as 5%. I suppose if they can get it, why not ask. But as a tenant, 5% is just too high in most cases. If a property owner is asking for 5%, negotiate or keep looking.

Second, recognize that option fees are non-refundable. If you don’t buy the home, the landlord still keeps the fee. In this way, a lease option for a home is similar to an option contract on a stock. The cost of the option is not refundable even if you choose not to exercise the option.

As a result, you should think carefully through the transaction before entering the agreement. Decide whether you really want to purchase the home, and whether you’ll have the financial means to do so, during the term of the option.

Finally, make sure that the fee will go toward your down payment if you exercise the option to buy. While this is typical in my experience, you may find some landlords who seek to treat some or all of the option fee differently.

Rent Credit

In most lease purchase arrangements, the tenant receives a credit that will go toward the purchase price if they buy the property. This money goes to the homeowner, and is generally not refundable. So it doesn’t go into an escrow account, and it doesn’t go back into your pocket if you decide not to buy the home. But it does reduce the home’s purchase price if you decide to purchase the home.

Related: 6 Surprise Expenses New Homeowners Should Be Prepared to Pay

While there is no universally agreed-upon amount, for residential real estate, 10% to 15% of the monthly rent seems to be a good rule of thumb. For a home costing $1,295 a month, for example, we offer a monthly rent credit of about $150. The rent credit is an important part of the deal for tenants for at least two reasons.

First, it of course reduces the cost of the home when you exercise the option to buy it. And second, it can help you build up a down payment on the home. The key is to make sure that the deal includes a fair rent credit.

When you look at the terms of the agreement, be sure to look at more than just the amount. For instance, we make the rent credit contingent on timely payments. If the rent is late one month, our tenant loses the rent credit for that month. This is a common arrangement, and one you’ll want to have on your radar as a tenant.

Maintenance Obligations

Recently, we’ve started shifting the maintenance obligations over to the tenant. This practice is not uncommon, particularly with land contracts or rent-to-own arrangements. From a tenant’s perspective, though, taking on the responsibility of maintaining the property may seem like an unwanted financial risk. Well, to some extent it is.

The contract should spell out exactly how maintenance time and costs are divided. For instance, the buyer may be responsible for basic lawn maintenance and exterior/interior maintenance, but only responsible for up to a certain dollar amount per year in maintenance charges.

Learn More: Does Paying Rent Improve Your Credit?

You can also divide basic maintenance from capital improvements, such as replacing the roof. Again, not all contracts will specify these issues, but adding them into yours could be a good idea.

If you do find a landlord who wants you to assume the maintenance obligations and you’re willing to accept this responsibility, here’s a tip: instead of taking on this responsibility on day one, consider delaying the transfer for six months. This gives you a chance to identify any latent issues with the home and to get them repaired on the landlord’s dime. In effect, this gives you a six-month warranty on the home.

Tackling the maintenance on the property on your own after this period may seem onerous. But it will also help you see if the property is one you can handle as a homeowner.

Purchase Price

Tenants make two big mistakes when negotiating the purchase price. First, they don’t negotiate for a lower price. Second, they enter into option-to-buy deals where the price is not fixed.

Related: Should You Ever Pay Off the Mortgage on Your Rental Property Early?

Since we began offering our homes on a lease purchase, not a single tenant has even tried to negotiate the purchase price. This is a big mistake. The purchase price is always negotiable on a lease purchase deal, just as if you were buying the home outright.

It’s easy to research home values on the Internet. Begin with online home value websites to get a rough guide. Then, look at comparable homes that have sold in the last six months. Armed with this information, negotiate a fair price.

Whatever price you agree on, it should be fixed during the term of the option. Avoid deals where the purchase price will be “agreed upon” later or based on some future appraisal. The option fee is paid in exchange for the right to purchase the home for a set price within an agreed upon period of time. If a landlord won’t agree to a fair, fixed price, look for another property.

Financing a Rent-to-Own Purchase

It may seem odd to talk about financing, since you won’t need a mortgage unless and until you decide to buy. But my recommendation is that you talk to a mortgage broker BEFORE entering into a lease option. A good mortgage broker will give you an honest assessment of your chances of being approved for a loan during the term of the option. While a broker can’t offer you any guarantees, they can arm you with important information that will help you make the best decisions for you and your family.

Learn More: What Types of Mortgages Are There and Which Is Right for You?

A lease purchase can be a reasonable way to purchase a home. Particularly if you’ve recently been through a bankruptcy, have bad credit, or lack enough cash for a down payment. In those cases, a rent-to-own home may be a good option.

If you’ve ever purchased a home this way, or have additional tips for others, please share your experience in the comments below.

Next Steps

Author Bio

Total Articles: 1083
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Ankur says:

Thank you so much for sharing this article. Great article, great content

Manshu says:

Thank you for another detailed and in depth article.

Christie says:

Thank you for posting this article. Very informing!

La Toya Brown says:

Thank you for sharing a wealth of knowledge from your point-of-view. It was extremely helpful.

Kaye Swain says:

Very interesting article and info on rent to own. We considered this when we were younger and this info would have been a huge help. 🙂

Maria says:

We recently purchased a new home, which we haven’t moved into yet. Our current home has no mortgage or liens on it and my daughter is interested in purchasing it. She already owns several rental properties, therefore cannot be approved for another mortgage. We are weighing the option of her leasing/renting it to own, but we’re afraid we will end up paying a large amount of taxes since her rent would be considered income for us. What would be the best way to go about leasing this to her for up to 30 yrs or until she’s able to pay it off….whichever comes first – without us taking a huge hit financially?

DR says:

Maria, while there will be some expenses you can deduct from the income you receive (such as depreciation), you likely will end up paying taxes on some portion of the rent. One option is to sell her the house and finance it yourself. By selling the house, you take advantage of homeowner tax breaks. You’ll pay taxes on the interest portion of the payments, but not the principal. But before you make any decisions, talk to a tax professional. Best of luck.

Sandy says:

Excellent!! Thanks. This article has met my needs today.

Ari says:

Hi! I was wondering if you could talk a little bit more about the tax consequences for the sellers in a lease-buy option. We rented out our home with an option to buy, and $200 of the monthly rent will be applied to the purchase price. Do we still count those $200 as part of income for this year, or is that applied as income only in they year that they do not exercise the option? Thanks!

Tasha says:

what do you do when you have moved into your rent to own home three weeks before the actual move in date , courstey of the morgage co and day one the ac is not working, the home was not inslated, pipes making strange noise when running water. The Morgage company / home ownwers not wanting to repair nothing . My contract hv not started yet , . How do I get out of the half ass rehabed home.

TOM says:

who would i talk too about having someone leasting my home with an option of the person to buy it, she is trying to get her credit score up to buy my home. not sure who too talk too, bank, finciance person. thanks tom

Tom, our company specializes in these types of transactions. Feel free to give me a call at 703-728-2663 and I can walk you through the key things you need to be aware of.

Carolyn Phair says:

We are looking to 3 bed room home / lease with option to buy with a pool close to 89130 zip?

DR says:

Tom, I’d say your best bet is to talk to a realtor. Since you already have a potential renter, however, you don’t want to hire a realtor and pay the fee. But an agent should be able to walk you through the process and perhaps even provide you with some standard forms.

David Watson says:

Wrong answer, with all due respect, a Realtor is least qualified to answer this question. The education an agent receives is typically one paragraph out of a very big book (Modern RE Practice 7th ed – Dearborn Publishing). Further the reason Rent-to-Own has a poor reputation in the traditional real estate circles, is that most do fail. Our local association’s counselor Michael Lafayette stood up in front of a 3 hour Lease Purchase class and prefaced by saying he would rather do a short sale then a Lease Purchase/Option. Realtors have no training on how to qualify, structure, and execute a lease option. Most states, including Virginia, have NO standard forms. I’ve spent thousands (as a KW agent) on education, contract review and continue to train on this niche business model. It is a model that does not work for everyone but can be a real win/win when it does.

mike says:

4 months ago my family moved into a home that we signed a contract on that says we will rent the home and purchase for an agreed price in 8 yrs or sooner. The owner of the home has a mortgage on it and they pay the mortgage, taxes, and homeowners insurance with the money that we pay each month, until we purchase it. State Farm insurance just dropped the homeowners policy because our contract together reads as a purchase. So the home owner has called around quotes on home and all too high, she wants to stay with state farm and the only way state farm will insure the home is if she gives them just a rental agreement from us. We have been asked to sign a generic rental agreement so she can give it to them. I dont understand, if she is the mortgage holder than it shouldnt matter, the mortgage holder pays the homes insurance right? Any advice? Thanks

While rent to own is a viable option, I would urge potential home buyers that are unable to obtain traditional financing to consider buying a home on seller financing using a contract for deed. The main advantage being that they will get all the tax advantages of home ownership from day one since they have equitable title to the property.

We have many homes available on our site with very attractive seller financing terms.

Mark says:

I am currently going to go into a rent to own agreement with the owner of the house that I have been renting for 2 yrs. She needed money for an operation of her sick father. She contacted me and told me that if I was interested in purchasing the home from her. I said that I was interested and she explained her situation of having to come up with her part for her dads surgery. She stated would leave mortgage under her name just wanted 3500.00 as down payment. She has since done that but mortgage company wanted her to purchase own insurance. She did purchase own insurance and all that good stuff. I am going to assume the payments on house, insurance, and taxes. I am wondering if I need to be included on the insurance for the house or should it just be her. She very honest and I don’t feel I would have any problem with her if anything happened to house. We are going to do this legally and sign papers to state that after the loan of the house is paid the house will pass into my name unless I can finance it under my name before hand. I read that rent to own or lease with option to buy might still qualify for the 8000.00 tax credit. Would I qualify if I assume all responsibility even though she has a mortgage on home?

Mark says:

Sorry forgot the part where she refinanced house for lower payments that is why mortgage wanted her to purchase own insurance. She did not get any extra money out of refinancing just what was owed.

nitro taylor says:

1% option? And no security? It takes longer to remove a lease option renter. If they know they are not going to buy they will not pay last months rent and will stay until the court removes them. You are looking at 3 months unpaid rent plus damages. I charge $4,500 option incase of this. Only $150 a month? That’s only $1,800, what kind of incentive is this? I give them 50% of rent towards purchase, ($750×12=$9,000+$4500=$13,500), it helps them tremendously. Negotiate downward? Why? Owner is allowing interest free house payments, (50% rent), to a unqualified buyer; the price is usually on the high side. Where else can you pay $9,000 a year or more towards the principal and not the interest of a home purchase? Hold off on maintenance? The lease/buyer is responsible for all maintenance from day one; that is why money is being set aside for purchase and renter has all the tax benefits. Purchase within 12 months and not have to worry about repairs for 6 months, please tell me where I can get a deal like that. This is not a perfect world, and if they decide to move, owner is often stuck with unpaid rent and damages.

Cindy says:

Nice article and very informative. I wish I had read it a few years ago. I’m in a 3 year lease to own contract and the option to buy expires in a few months. The locked selling price is $250,000 after paying a down payment of $30,000 (the original price was negotiated at $280,000, so less the down payment up front). My monthly payments are $2400 and we are using a 30 year mortgage amortization chart with an 8% APR to determine what % of the monthly payment actually pays down the cost. Since the fallout of the housing market, the house will never sell for the price we agreed to in 2007. From research, it seems that similar homes in the area have been reduced by as much as $100,000.

Although, I love the house, we will never be able to get it financed based on our leased contract. We are now forced with a very hard decision to either walk away now or continue to spend our hard earned money in an over-priced home.

Ben says:

We completed the first year of a Lease/Option contract home in Jan. 2011. Part of our payments go toward ownership, property taxes and insurance (defined in contract). We pay for maintenance and upkeep. From the information in the above article, it appears we will qualify for the home buyers tax credit. Does this make sense to you? Thanks a lot.

DR says:

Ben the home buyers tax credit has expired.

COLA says:

DR., PLEASE HELP:…………….I would like to enter into a lease/option on a home i recently saw for rent, unfortunatley the rent payment is high and the home is up for sale at a alarmingly high rate, BUT i LOVE the home and would like to buy. The price tag is $339,000 (NEW CONSTRUCTION) and rent is listed @ $1800.00 monthly!!! it’s been for rent for a very long time. How can I get them to come down on the monthly rent to maybe $1500.00 given I put a higher down payment +Security deposit and enter into a lease/purchase contract that included a substantial down payment when time to purchase the home?

Mike says:

I currently have leased a home with the option to buy. In my lease it says I pay the property tax, which I have done. Even though I don’t own the home yet can I write the property tax off my taxes?

DR says:

Mike, my best guess is no, because it would be treated as just part of the rent payment. The fact that it is designated as going to property tax doesn’t change that fact. But that is just a guess, and I’d suggest consulting a tax professional before filing your taxes.

Shannon says:

My father has a house that my husband and I are interested in purchasing, but won’t have the down payment. Although we do have excellent credit, we just want to pay off some other obligations before starting to save for a down payment. I know my dad would be open to other options, would you recommend the lease to own, my dad acting as the lender, or a installment land contract? Additionally, what type of outside party would we need to facilitate this, if any (i.e. real estate agent, attorney, etc.)?

Another factor to consider is that because my husband has been overseas with the military, we could (and would love to) still qualify for the first time homebuyers credit if we complete our “purchase” by June. If we could qualify for that, then we would be able to have the down payment available by the time we received our 2011 tax return. Not sure if that would change your suggestion.

Thank you for the informative article! By far the best I have found while researching this issue.

yoyo says:

You are 1 year too late for the homebuyer tax credit.

Angela says:

We have a possible Lease to Own situation. The owner does not owe anything on his property and has retired and bought a property to move to accross the State.

If they do not own on the property then this would put us in a better position because more money would go towards paying down our purchase price, I expect. What type of percentage would you expect or reccomend should go towards the down payment? What type of percentage would the owner fairly take, appreciation?

Could a Seller Finance Contract Deed be a good option? I am a little confuse on how that would work.

Thank you for your time!

Tiffany says:

I am in a situation where I was in a lease with option to buy home and the SELLER needed back into the home due to financial/legal difficulties. We were given a date they needed to be in by and told if we wanted to buy the house now we could if not then they needed back into the home. We were not in a position to buy the home at that time and had 2 more years left on the contract but agreed to move out (due to the selling price of the house compared to homes being sold around it was significantly higher) . In this situation what happens to the option money that we put down? Should it be refunded since they broke the contract?

Bill says:

DR –

I have a client who would like to purchase a rental property and rent it out to their son. If they were to convert this into a rent-to-buy arrangement, what are the potential tax consequences?

DR says:

Bill, the first thing I’d suggest is consulting a tax professional. I’m no tax expert. Having said that, the tax consequences depend on the terms of the deal. Is there an upfront payment to lock in the purchase price? Does a portion of the rent go to the down payment on an eventual purchase. I believe that the tax consequences ultimately will hit when the sale occurs, not during the rental period. But again, they should consult a tax accountant.

Barb says:

Hi, I really need some help, my husband and I had purchased a home in May of 2010, well we thought we were home owners, come to find out we are rent to own. The company we went through told us that we are first time homeowners and that we can receive the $8000.00 tax credit, we received this credit and gave it to the company. This did lower the purchase price of the home, but come to find out the deed is not in our name. My question is if we move do we have to pay back the whole $8000, are just a percentage of it?


sue b says:

Someone had asked this of me “when we are in a rent to own relationship with a landlord, with only a signed agreement between them and us, no attorney involved, and the paperwork cites that we are responsible to pay property taxes, should we not then be the ones reporting the property taxes on our taxes? the owner is.”

MarK says:

My husband and I were letting my sister and her husband rent to own our house. We do have a mortgage on it. I know we made a big mistake by not drawing up a written contract….it’s all been verbal. The mortgage payment consisted of the monthly mortgage payment, property tax & homeowners insurance. They have lived there for 2 yrs and for the past year have had a dispute with the neighbors and because we don’t want to be involved our family members decided they are moving and are going to sue us for all the rent that they paid to live there and any renovations they made there. We never asked them to do these renovations. They took it upon themselves to do so, some of which we were never privy to beforehand. My question to you is, do they have a case? Will we have to pay them back for 2 yrs of rent and renovations?

Rob Berger says:

Mark, it’s impossible to give you any legal advice. You’ll need to consult a lawyer. That said, I find it hard to believe based on what you’ve said that they have a basis to get their rent back. Good luck!

Shaun says:

Re: Rent Credit. Is there anyway to avoid paying income tax on this portion of the rental income since it “may” be converted to principal payments?

For example, can it be escrowed?

Raine says:

Can rent-to-own only be 1-3 year agreements? Is it not possible to rent-to-own until an agreed upon price is paid?

Rob Berger says:

Raine, I’ve never had a rent-to-own agreement with a term longer than 3 years, but I know of no reason why you couldn’t. As a landlord, I like longer agreements because it minimizes vacancies. So if you can get a longer agreement, I would. But you may want to consider putting automatic rent adjustments in the lease agreement.

Verna says:

How do you know what rental amount to pay and what should be extra to go towards purchase? (Asking price is $119,500- Zillow is $112,000. Who pay taxes, rent, HOA dues? Should there be an amount paid to keep purchased price firm? Would this go towards purchase? Should you pay the asking price or the Zillow amount? Do you need to use a real estate lawyer?This is an excellent website. Very helpful?

Rob Berger says:

Verna, those are all great questions. As a landlord, we always charged an upfront fee of 1% of the sales price. The fee was nonrefundable, but went toward the purchase price if the tenant exercised the option. The sales price was always fixed. And about 15% of the rent went toward the purchase price if and when the tenant decided to purchase. However, our lease option terms were always tenant-friendly, in my opinion. I’ve seen agreements that favored the landlord (e.g., no stated purchase price, much higher upfront fee, etc.). A lot comes down to what you can negotiated. In terms of the value of the home, I never rely on Zillow. In my experience it is highly inaccurate.

And don’t look to attorneys for counsel on the subject of lease option. I have been through dozens of attorneys and I have come to the conclusion that they just don’t get it. They have been trained to represent a client on one side, or the other, of an issue. They cannot play the middle man; they seemingly cannot represent a seller and a tenant buyer in a dual capacity. Further, they see liability around every corner. Sure there are risks associated with lease options, but the benefits can far outweigh the risks. . I’ve spent thousands (as a KW agent) on education, contract review and continue to train on this niche business model (aka rent-to-own). It is a model that in not for everyone but when it is, it can be a real win/win for all involved. I have found LegalShield to be a great resource for legal counsel on a variety of issues from the trivial to the traumatic (including Lease Options).

Vernon F says:

I was in a 1 year rent to own lease with an optional second year that ended was back in December of 2011, it is now October 2012 and no new lease was ever signed. Am I now just considered month to month or what ?

Vickie Pearce says:

Hi. I’m a seller considering to offer my home as a Lease Purchase. The offer is to good friends and I want to make sure all of the parties are protected as much as possible and comfortable with the transaction. We plan to work with professionals and get everything in writing.

For their peace of mind……. I was interested in your answer to Tiffany’s question:
What happens in a situation if the SELLER changes his mind?

lorie says:

Hi, I have a family very interested in doing a lease purchase on my property. Most of the terms have been discussed and are fair to both parties. My questions are:

Does the option fee have to be held in escrow or can it be used by me,the seller,at any time, since it is non refundable? I know it counts towards down payment.

Is the rental premium placed into escrow account? I assume that the bank financing loan would want to see that money put aside.

Buyer is offering to pay for maintenance up to $500 and all general upkeep. So what if frig needs to be replaced or the roof needs to be replaced? Who is responsible,, and can the accumulating rent premium be used for a large issue?

Seems like good idea to get termite inspection. If it is clear should buyer or seller continue with a monthly warranty? Also, if home is generally in good working order, disclosure discussed, and home is being sold “as is”, is it fair to expect all maintenance is taken on by buyer?

Are there any reasons a buyer under contract can back out of purchase and receive rent premium refunded?

Thanks for any input you can give. I am currently in bankruptcy with 100percent payback and am losing over $200,000 in equity as my home has not sold for over 2 years. I am so happy to find people who love my home as much as myself and want the terms to be a win win for both of us.


Rob Berger says:

Lorie, great questions. Here’s my take:

1. Option Fee: Like you, our option fees are nonrefundable, so we don’t put them in escrow. They belong to us upon payment.

2. Rental Premium: We don’t put that in escrow either. We make the rent premium non-refundable, so we never have to pay it back.

3. Maintenance: Having the tenant pay for maintenance is a great plan (so long as you have confidence they’ll keep the place up). I’ve never views something like a refrigerator as maintenance, but it could be if you write the contract that way. I roof is a closer call, although you’d eat up the $500 fast. One way to look at it is that capital improvements are not maintenance. But again, the key is to be clear in your agreement.

Finally, if you have a realtor, they should be able to help you with these questions as well.

Best of luck.

Gary says:

I thought you said in your article you didn’t believe in rent premiums, that you heard “horror stories” of people paying higher rent? You said “rent should be whatever reasonable market rent the home justifies. The rent should not be higher because of the lease option component of the deal”. Which is it? You said “rent is rent”. Well, premium means just that, a premium above the market rent to be applied toward the purchase price. PLEASE, any renters reading this, PLEASE take it with a grain of salt. Do some real research.

Rob Berger says:

First off Garry, let’s take a deep breath. The good news here is that the fate of the universe doesn’t hinge on whether you and I agree on how to approach a lease-option. What I can’t figure out from your comments is whether you are pro-landlord or pro-tenant. That being said, in my experience, there is a range of rents that are reasonable. It’s not as if there is one reasonable rent, and a penny more or less makes it unreasonable. Given the types of homes we rent, the reasonable range is usually within $100, say $1,100 to $1,200. What we typically do is charge the high end of this range for a one-year term, and the low end range for a 2 or 3-year term. Why? We’ve learned that the biggest expense is vacancy and turnover. And the rent we charge doesn’t change for a lease-option. Now, you may agree or disagree with that approach, but I think it is fair for both parties, and our tenants agree.

Gary says:

Are you serious? NO ONE in their right mind would sell their home under the terms you describe. I have NEVER seen an article on a RTO anywhere on the internet so misinformed as yours. Just ask yourself, would YOU agree to lock in a price – negotiated at todays market – to sell your home 3 years in the future for a measly 1% of the purchase price as your only incentive?!?!? $2,000 to sell your $200k home with no further financial penalty to the buyer if he changes his mind? Locking in a price based on todays market to an unqualified buyer and a fixed rent amount would be insane for the seller. No owner with half a brain would agree to this. An option fee of at LEAST 3% (non-refundable) and a rent premium of at least 20% would be the MINIMUM any savvy seller would/should accept. Why is paying a rent premium a “horror story”? ALL the rent premiums and option fee are applied to the purchase price when the buyer exercises his option, a “forced savings” for the buyer if you will. Gives the buyer incentive to complete the deal and the seller incentive to lock in a fixed price/rent. If you have a house you would sell to me under the terms you describe, sign me up. What have I got to lose? I could negotiate a price based on todays market, live in your house at market rents with none of the ownership responsibilities, watch my equity grow with my only risk being 1% of the value we agreed on. I wouldn’t even exercise the option. I would just sell the option and collect the equity you put up all the risk for and traded away for chump change. This article is ridiculous. Please remove it, or at least correct it as you are misinforming buyers what they should reasonably expect in a RTO.

Attorney says:

I know this is an old comment that I am responding to, but for the education of the public I am responding. A lease-options generally favors the seller, not the buyer, unless the buyer is 100% certain to buy. It is my dream as a seller to do lease-options all day without the buyer exercising the option – free money. Example: Home is 275K, market rent is 1400 per month. I ask for $5000 down (the non-refundable option money) and charge $1600 per month rent (with $200 going toward buyer option credit). If I would have just rented the house at the end of 2 years I would have made $33,600 in rent, but with a lease option I made $43,400 = that is a difference of nearly $10,000 AND I still have a property to rent or sale to the next person.

landlordMR says:

Attorney, thank you for educating.
What happens when the option expires? The buyer loses the option premium AND the rent option credit (in your example 43,400-33,600=9,800), right?
What if they ask for an extension? How would you renegotiate using the example your provided? Thank you in advance.

Gary says:

OH MY GOD! I’m rolling on the floor wetting myself! I wrote my other comments when I got as far as your stupid “1% rule”. I went back to amuse myself a little more when I saw you ACTUALLY give back 15% rent credit to the renter toward the purchase price you negotiated at market value from 3 years previous! BAhahahahahah! Please, stop, you’re killing me!! There went ANY “profit” you got from the 1% option fee! (wiping tears from my eyes) You actually do THIS?!? OMG, and you are an attorney?!? Why on earth would you do that? You are gaining NOTHING and trading away EVERYTHING! Only in a plunging real estate market would this gain the seller anything, and it is unlikely any buyer would pay a option fee unless the market is stable or climbing. THINK about it for a second, please! Everything is in the buyers favor and I can’t see one single incentive to the seller. I’m sure you as the moderator won’t post my comments, but I see at least a few other people with a bit of common sense pointed out your ignorance in this matter. PLEASE, PLEASE, remove this article!

Rob Berger says:

Gary, you make me laugh. Been doing this for years, and one thing amazes me deal after deal. Renters pay the rent to own option fee and then never buy. I’ll never understand it. Anyway, I think the arrangement is very fair, and when you factor in savings of 6-8% in fees we don’t have to pay when we sell, the profit is quite good. However, you always have to keep your market in mind. I buy real estate in Ohio. This is not a market where prices will jump 30% in three years. Won’t happen. Anyway, thanks for your entertaining comment.

Mike says:

Is there additional penalty for not end up buying? Is the penalty fee negotiable?

Rob Berger says:

I’ve never seen a penalty fee. You do usually forfeit the option fee.

Gary says:

A 15% rent rebate off of market rents, a price negotiated at todays prices and locked for 3 years, all the equity gained during that time in my pocket, none of the risk or burden of a home owner, the right to sell my option and make a huge profit off your house, and all for 1% of the price we agreed to, which I get back if I buy the house. Incredible. Incredibly stupid.

Gary says:

And, oh yeah, my credit is shot and a bank wouldn’t touch me with a 10 foot pole, but I’m a “virtual” homeowner anyway with ALL the benefits, NONE of the drawbacks, and putting up almost no money of my own, thanx to you! Bwawhahahahahah!!!

Gary says:

Kudos Rob for posting my comments when you didn’t have to….but I’m sorry, you’re wrong. Even in Ohio, you’re wrong, or at least not fully explaining how this formula works for you, the seller. It ONLY works for you because Ohio renters don’t have the sophistication to exercise their option, certainly something the average seller would NOT want to depend on. And the problem is your article is read everywhere, not just Ohio. I agree, renters frequently don’t exercise their option but for your formula to work for the seller the renter would have to NEVER exercise their option. Obviously, many renter DO finally buy. Based on your formula, if you did 10 options on $200k homes as you describe, all you would have to have is one of those homes gain 10% in value (certainly plausible, even in Ohio), and that particular renter exercise his option on that one house and you just lost every cent of “gain”. The hassle and headache of 10 option agreements, all gone with one home gaining 10%? No way! A more realistic (and normal) option fee of 3% in the same scenario and you still net $40k even if every renter exercises their option. And who says you have to do an option to avoid the 6-8% in realtor commissions? I do it all the time in a straight sale. Since I place most realtors in the food chain somewhere between a pimp and a used car salesman, I avoid them like the plague unless I absolutely have no choice. And the rent rebate? Absolutely no rhyme or reason to that one. Your formula is a losing proposition to the seller EVEN WITHOUT that gift to the buyer. That is just icing on the cake for the renter. You are actually LOSING money on EVERY OPTION YOU DO!. Take a look, using a $200k home: Option fee $2000, check. Rent paid over 3 years (let’s assume $800/mo) $28,000, check. Rent rebate, $4,320, check. Net to seller, NEGATIVE $2,320, uhhhh…….check. And for what? To sell a house – even if the market is stagnant – for the same price you could have got 3 years prior, except you would have collected the full market rent during that same time period? DO THE MATH Rob! You’re formula just doesn’t make sense, EVEN IN OHIO!!! It reminds me of a joke of the two rednecks who buy watermelons for $1 each in the country, drive to the city and sell them for $1 each. After a few months of no profits, they conclude they need a bigger truck. Come on man. Suck it up and admit this formula only works if the buyers are morons. And PLEASE, make some corrections to your article or at least reference your formula can only be expected to be found in Ohio on homes owned by YOU. Or at a MINIMUM, explain that the ONLY reason a seller would ever make money this way is if the buyer DOESN”T exercise his option (apparently the way you do). I guess if you sold anything (new car?) for any amount of money ($100?) and the person never comes to collect their purchase, you would in fact make money.

Rob Berger says:

Gary, I couldn’t disagree more. As with rent (see my comment below), a reasonable price for a home at the start of a lease-option falls within a range. There is no one reasonable price. For a 3-year lease-option, we tend to set the price at the high end of the range, and agree to sell the house at that price during the term of the lease-option. A 3% lease-option fee is both unreasonable, in my opinion, and unrealistic for the types of homes we own. If that works for you, great. But it doesn’t work for us.

And I don’t follow your example. First, we charge rent of about 1% of the value of the home. That’s the market in Ohio. Second, I don’t follow how you conclude a negative amount to the seller. Take a $130,000 to $140,000 home. We would set the lease-option at the high end and get a non-refundable lease-option of $1,400. We charge rent of let’s say $1,300, just a tad below 1% and offer let’s say a $200 per month credit should they buy the home. Assuming they buy at the end of 3 years, they have a credit of $8,600 ($1,400 + ($200 x 36 months). So they pay us $131,400.

Now what’s the value of the home. At the start of the lease-option, it was worth $130,000 to $140,000. Three years later in Ohio it’s probably worth $130,000 to $140,000. In a “hot” market, it might be worth $135,000 to $145,000. But of course, we’ll be paying 6% in realtor fees plus about 2% in closing costs (standard where I invest).

For those renters reading these comments, I’d suggest never agreeing to a lease-option that doesn’t have a fixed price that is reasonable. There’s no value in buying an “option” to purchase the home in the future at some as yet agreed to price.

Jamie says:

Hi Rob,

Thanks for this article. It has helped me as a potential tenant who wants to propose a lease option to an investment company that is renting out a number of homes in my area. They have one particular property for rent only and we love it. It has been sitting vacant and they have continued to market it as a rental. They have already reduced the $1750 monthly rent to $1650 after two weeks on the market. And it is now still available but no further reductions. It has now been almost 2 months on the market.

We have called the company and was told by the receptionist that they hold onto these investment properties for 25 years before considering selling because they got such a great deal on the rate and purchase price.

My question is how do I convince an investment company that it makes more sense to let us lease option on this property instead of only renting it? I ask this because it’s not just a homeowner but a company that rents out the property as their sole business. This particular company has purchased nearly 40 homes in my area that were short sales, mine included but is still pending (hence why we need to either rent or lease option our next home).

Although we love the house, it does not make sense to only rent it long term. For one, the rent amount they want we could buy a home for less once we got our credit improved, and two, typically under rental agreements rental rates increase so who in their right mind would want to rent long term knowing they will continue to pay a ridiculous rental amount. And I don’t understand why the investor would think it makes sense to hold onto the property for 25 years before selling regardless of what great rate they got.

The house is valued about $173,841 by Zillow and $178,836 by eppraisal.com and $202,449 – $237,658* by homegain (which I think is more accurate if it wasn’t for the current market). The home sold in Dec 2012 for $168k to this investment company. The current rental rate at $1650/mo even for this house I think is high given what surrounding homes have advertised for rent.

This company’s portfolio just in my area has nearly 40 homes, so I figured why wouldn’t they let just one property go into a lease option? Unless I am missing something from a landlord/investment company’s perspective in why it makes sense to hold on to the investment long term.

Furthermore, do we have much going for us to negotiate on the house purchase based on the current value and rental values of the area? This house really could sell in a good (normal) market for $220k+. That’s probably why they want to hold onto it.

Sorry this is long-winded but you have some great info. Any suggestions are very much appreciated! Btw, why do so many lease options never make it to an actual sale, especially if you negotiate in the beginning?


danielle says:

I am currently ending my rent-to-own contract when it is due. However the pitfall(s) I have encountered are the owner is just plain shady! Yes I have some credit issues from my past and never knew I could claim a $8000 tax credit most certainly will apply this year, the whole purpose should be a win win for the seller and the purchaser. I get a home and you get paid unfortunately my contract is ending because I have opted out and that is a choice and a chance for both parties. I will try again but with the more insight and knowledge in the future. I have advised the owner of my intentioons and they have inspected the home, taken pictures and are going to list the home. My sister is an attorney and states while our contract is still enforce she does not think she can legally list and show the home until I actually give her written notice and 30 day notice of my departure. I am wondering does anyone know this to be true?

Crystal says:

I had a question on lease to own homes. So lets say the rent is $2,000 month and $300 is put aside to be used a potential down payment as you plan on purchasing the home. Who is collecting that $300? The bank? The homeowner? On the other end, what if at the end of the term you decide you actually don’t want to purchase the home, what happens to that $300 that had been saved every month, lets say for the past 4 years? Do you get that $14,400 back? Also, when you enter the contract with the option to buy later, is the purchase price the same as at the beginning of the lease? For example, the lease is 4 years and the option to buy the home will be $300,000. So 4 years has past and you now want to purchase the home, however the home prices in the area have raised significantly and the home is now valued at $550,000. If you want to purchase the home, can the price of the home be raised by the homeowner to the purchaser? I appreciate any advise you can give me, thanks.

Martha Branigan-Sutton says:

Thank you for this informative article. Would you be willing to share a sample lease option agreement?

Jake Mulanax says:

My brother is purchasing a house that is rent to own and the landlord is currently trying to seek a loan out on this house. Is this legal? The landlord also says if they can not get this loan then they need him to move out so that they can move in. What options does he have? There is a signed lease on this property as well.

Rob Berger says:

Jake, the signed lease should give your brother certain rights. A landlord can’t simply evict a tenant contrary to the lease in order to move in. Your brother should consult an attorney. As for the mortgage, there’s nothing that I’m aware of that prevents a landlord from getting a mortgage on a house that they own. If your brother came to purchase the house, the proceeds would have to pay off the mortgage first.

Adriene Wright says:

Thank you very much for the informative opinion,do you know of any honest as you would call them ” pro-tenant” landlord in South Florida area? I am looking into entering a rent to own lease and would really appreciate someone who has both parties favorable outcome. Thanks again I really enjoyed reading your opinion, people should really consider that this article is optionable never once did you mention that this is the only way to go, I definitely found it insightful.

Dee Mens says:

I was on a RTO contract before with an option to Buy, it’s expired now. I was not successful in owning the property for a reason I just want to keep to myself. I left the property last year and my complain and claim is on the hand of an attorney at present. My question is: if I drop my attorney, can i file my total rent credit as a loss instead ? Does the $8,000 Tax Credit applies to me was this a one time offered only or can it be extended depending on individuals case . I rented from 2009, 2010 and extended contract on 2011, 2012 and left 2013. I am trying to recover my hard earned money; if landlord do not give any compensation to me; any suggestion of other way I can do.

Sandra Riggs says:

I was wondering if I pay 386 rent and my lease to own contract is for 10 years. How much of the 386 actually gose towrds the purchase price of the home. I payed 1000 for a a chance to be able to purchace the property. I’ve been here for 4 years it will be 5 Nov 2015 than I ill have the option to by and than agiin at the last five years or the end of my last five years i pay all the property taxes and i do all the repairs and matienace on the property and the property was considered comdemmedmed before I moved in it which I did not know before I moved in. Please Help. I dont want tolose all the money I put into this property. Blessings, Sandra Riggs

Sandra Riggs says:

I thought all the money that I’m paying is was going towards the purchase price of the home . Plus the 1,000 I paid up front. Sandra Riggs

Rob Berger says:

Sandra, the terms will be governed by the contract you signed.

Kiele says:

I am considering a RTO option with my landlord. The property as it is now is a duplex, does the rent that the other family is making go to me since I would be acquiring the rights to the house or does it still go to the current owner? If this money does come to me, do I get to use that money as my premiums?

Rob Berger says:

Kiele, it’s all governed by the contract. So you’ll need to read the contract to answer your questions. That being said, I would be very surprised if the rent from the other unit goes to you now since you do not own the property yet.

Tanya says:

Hi please help! I am currently in a contract with my stepfather and mother on our 3 bdrm home it’s a duplex where the neighbour own his side. My parents hold the mortgage until I the purchaser finish paying for it in 2018. My mother says I can’t claim my 600/ month payments when I do my taxes but the people at h&R block told me I am a renter until house is payed foo am so confused who is right? Can you help?

Rob Berger says:

Tanya, I’d trust the tax experts at H&R Block. That said, in my experience, until you actually buy the house, you are a renter.

Jeremy says:

Thanks, this has opened my eyes on what to discuss and expect with my upcomming lease to own option.

John Leonardis says:


I am considering this option from a sellers perspective. I was wondering about the option money and the monthly rent credit. Should that money be put aside and given to the renters at the end of the lease when the buy the home or is the money collected just subtracted from the purchase price? I keep reading about the option money and rent credit being down payments.

Rob Berger says:

We apply it as a down payment.

Brenda says:

My husband an I entered a rent to own contract 9 years ago. My husband passed away a year and half ago. I have tried to get out of the contract because of health problems. I have been told no I can’t do anything about it.The place has changed hands four times in that 9 years. I still have 6 years to pay on it and I don’t know what to do. I know I cant care for the place and property much longer. I am 63 years old. Any advice would be helpful. Thank you

Rob Berger says:

Brenda, I would consult an attorney in the area where you live. Due to your husband’s passing, you may be able to get out of the contract. But you’ll need to talk to an attorney who knows the laws where you live.

valerie mckanic says:

I entered a Rent to own lease in 2012, i put 13,000 Down Payment, my monthly payments was $482, i moved out Jan of this year because the Landlord told me that he was adding 2016 taxes into my house payments which would have raised my payments to $540, i couldn’t afford to pay on a fixed income. My questions are, Could the Landlord do this? Should or Can i get some of my Down Payment back? Thank You!!!

Rob Berger says:

Valerie, this will depend on the rental agreement and the local laws where you live. If you consult a real estate lawyer with experience in this area, they should be able to tell you what remedies you have, if any.

Victoria says:

Great article, Rob! Thank you so much for spelling it out like you did. My husband and I are about to enter into a RTO agreement and we are both terrified. We’re both young with young kids and this is a huge decision to make. I’ve talked to a few smart friends and relatives and Ive googled until my hands hurt. Maybe you can answer a few of my questions.

A little background-
Its a mobile home in a park (in Michigan) and we are putting $3,000 down on it. The balance owed on the home is $19,500. Our lot rent will be $308 a month and they require a security depsoit of $308. The rent credit has yet to be determined because the park is in process of buying the home themselves (so we havent made it that far yet). The park owner has told me it would be no more than $400 a month. All of this is no problem to us at all.

My main question is, aside from the basics, what are we looking to pay in order to move in? I understand the obvious $3,616. But what about title insurance, title fees, sales taxes…etc?

I’m also assuming I will be classified as a home owner immediately and will have to seek out Homeowners Insurance?

Thank you so much for being so informative. You have seriously done me a massive favor with your willingness to explain so much. I already feel better, even if you dont reply!

Rob Berger says:

Victoria, in the deals we’ve done the tenant is NOT the owner during the RTO period. They are renting the property and building up credits that can go toward buying the home in a couple of years. They don’t become owners until we actually close on the sale. That’s how we’ve structured the deals with our properties.

Brandon says:

I am currently looking to purchase a house/land through a type of owner financing. The seller has no mortgage on the property as they are the deed holder. We have discussed a purchase price, down payment and a monthly payment as well as an additional annual payment to pay off the property in a mere 3.5 years. We have discussed that I will assume all maintenance of the property as if I were purchasing conventionally. There will be no option fee or length terms. The seller will maintain insurance and property tax payments in their name with the agreement that I pay them. With all that said, when final payment is received and I am paid in full, what additional cost will I have to pay to receive the deed in my name? Will I need a legal agreement to enter into this under the above terms? Any advice is appreciated! Thanks!

Danielle says:

We have had our manufactured up for sale for quite some time now, and have someone that is very interested in renting it for 3 years until she gets her credit on track, then wants to buy it. It’s only 3 years old so the mortgage is a little higher than some think on a home like this. I assumed she would just pay the mortgage and lot rent and when she is ready to buy we transfer the mortgage to her. A down payment seems silly in this aspect. But it’s terrifying thinking so won’t buy it and be stuck with it again. But I guess that is the risk. Is this too simple, to just have her pay what we would be paying if we lived there?

Thanks for any input!

Sheraunda says:

4 years ago we entered into a buyers agreement. I just noticed that the seller has never signed. So I asked him to email me a copy of the agreement witb his signature. His repsonse was. Im willing to sell if you are in a position to buy. Basically he is saying that we have been renting this house the whole time even though we are paying the amount specified on the contract which includes the taxes. The utility bills are extremely high and the only reasaon we have continued to live here is the fact that we would one day be homeowners. Do we have a case in court?

Suzann says:

I have entered into a Lease with option purchase with a single lady + her 2 minor children. I asked her to begin with if her boyfriend lived with her, she said NO. Now I find her boyfriend is there all the time, is he considered an unauthorized tenant?? I had the maintenance done on the heat pump and she couldnt pay so I did the Lease says she is responsible, is this a breech in the Lease?? Also the grass was 18″ tall, is this a breech?? The property has a carport and she has filled it with appliances and furniture, etc. and has the whole carport wrapped in plastic, and has all kinds of items laying around the driveway, you cannot park where ur suppose to or turnaround for all the debris, Is this a breech of contract. She has only been in for 4 months and the place is a mess. Can I terminate the lease and evict her????

Suzann says:

On my above comment it is my property, not sure I made that clear.

Suzann says:

I have entered into a Lease with purchase option on my property with a single lady + her 2 minor children. Its only been 4 months and she already has her boyfriend living there, is he considered a unauthorized tenant?? She does not take care of the property, the grass has not been mowed in 5 weeks its 18″ long. The carport is now filled with all her storage items out of her storage bldgs, appliances, furniture, boxes, etc. and the carport is wrapped in thick plastic. The driveway is filled with debris, bicycles, cement mixers, ladders, grills, fencing materials, etc. She now parks in the grass. She has made alterations to the home without my permission and her boyfriend is doing it, not a licensed plumber or electrician. She is late at least 4-5 days on her rent every month since she moved in. I believe this is enough reason for eviction. Just wondering your suggestions. Thank you.

Elisia says:

I have a question if ya don’t mind. We are in a lease with option to buy. We love the house and everything however it was never disclosed to us that it floods from the run off of the other communities. We have lived here for 2yrs and have had over a foot of water with having to chase my kids toys to keep them from floating away. We gave them $6500 towards the purchase of the home but we really dont want to be dealing with this issue all the time. Is there any thing I can do we live in Pennsylvania. She wants too much for it with the flooding issue and the township says its been ongoing for the past 30yrs.

Cindy says:

Hi Rob my question is who is responsible in paying the taxes and Insurance on a rent to own house the tanent or the owner?. I made the contract with the actual owner and I am looking to learn regard the law and regulations in regard a rent to own process for the state of Florida Thanks again Rob for your Wonderful knowlegde and wizdom I really appreciate it.

Rob Berger says:

Cindy, in all of our deals the landlord is responsible. The landlord still owns the home during the rental period. I suppose there could be local laws that change this, but not that I’m aware of. Of course, by contract the tenant could agree to pay taxes and insurance.

Cindy says:

Thank you very much Rob for your help we really appreciate your service may God bless you are so kind in provide free consultation online to the public thanks again for great knowledge.

Cindy says:

Hi Rob I confronted the seller regard the taxes and I told him I talk to an real estate atorney. regard my right as a buyer he started to act so defensive. I personally think I caogh him on his lie because as I had told you before he was trying get me to pay taxes on the house as a renter.

S Harris says:

Do you need to specify who pays closing costs after the 12 month lease option is up? Do you go that far in with the lease to buy contract?

Crystal says:

I’m looking for help on my house ..I think know my land lord is screwing g me over …I’m on a land contract option to buy but I’ve lived her 4 years and he just came out a week ago and told me he’s charging me 7 percent interest that I never new about and the contract is hand written …he owns this place scence 1994

Rob Berger says:

Crystal, take the handwritten contract to a real estate attorney for advice. If you don’t know a real estate attorney, start with a real estate agent. They may be able to help you, and they should certainly know of an attorney you can speak to.

Mary Ann Wells says:

We are in a two year Lease to Purchase contract. We gave the owner a $5,000 down payment and pay $2,000 each month with $500 of that going towards the purchase down payment. At the end of the two year contract we should have a total of $11,000 going towards the down payment. We just found out by notices posted on door and looking at court dockets that the owner has not made the mortgage payments to lender and the house is in now in foreclosure. We are wondering what options we have. Do we wait for foreclosure to finalize with bank becoming owner and directly work with them to purchase home? Should we stop paying her directly and put money in escrow account? Will we sue her for our down payment? We’re really at a loss here.

Pieper says:

Mary Ann, I’m no expert was was in the same situation. I also realise it is now 8 months after your post, but thought my input may help others in the future.

We made payments every month on time each month and spoke to the sellers often. They never mentioned anything about their having any financial problems. One day, I noticed a car stop in front of the home and took several pictures without even exiting the car. I asked again if there was a problem with the home and was again reassured all was well. Well, she must have felt guilty and contacted be toward the end of that month and told me that their mortgage company was planning to forclose as her husband had had a severe accident and hadn’t been able to work. I’m not sure at what point they stopped paying their mortgage, but she told not to send the payments to them anymore, so we didn’t.

By the end of the next month, we were contacted by a local real estate company who informed us of the foreclosure and offered us $2,000 if we would vacate within 30 days and leave the home broom clean. What a deal. We still had the previous months rent, didn’t have to pay the next month’s rent AND

Pieper says:

AND got $2K. We were able to find a new place close by, pay 1st, last & deposit, and could still afford to hire help to move on such short notice.

My advice would be to stop paying but don’t spend it. You are there legally and have done nothing wrong. The mortgage company’s beef is with the home owner, no you.

chad stewart says:

I understand that markets vary across the country, but I see no incentive here as a seller to even consider a rent-to-own based on the conditions that you list. There is no up-side to me.

To set market rate rent, then add the lease-option fee monthly, that is fully deducted from the future purchase price provides *some* compensation to me in the event that they don’t buy the house. If I am interested in selling – but someone wants ME to shoulder the financing for YEARS, there should be *SOME* benefit to me, or they can keep looking, or keep renting. I know you are trying to help people avoid traps, and I started the article hoping to find something that the potential buyer, and myself as the seller could read together to come to a fair and equitable rent-to-own agreement, but the outline above is no different to me than continuing to rent the home to them exactly as our lease is structured. When the term is up, if they want to buy the house, they can proposition me then.

In the example you’ve set, the potential buyer loses – because the potential seller chooses not to sell.

Accountant says:

The benefit to the seller (and it is a huge benefit) is you get a better tenant who takes care of the property and extra money in the process. Should the tenant not buy – you just make extra money with no effort. I would do lease options all day – it is definitely in the sellers favor.

Barry & Rose says:

Doug, Thanks for posting a lot of helpful information! While searching the real estate market for a buy that fits our budget (we short sold, are a family, pay high rents for 7 years and still collecting funds for a d.p. after paying down debt upon short sale). For the modest priced fixer uppers that we’re looking at, I’m competing with banks and flip agents for properties. Its so competitive. The fact that we’re a family in need of a home counts as nothing.
So, I’m looking at this option of rent to own with a minimal d.p. I’m in NJ where foreclosures are on the rise while rents are escalating (no exaggeration) as people try to rent portions of their homes to not go under (for prices that would typically be for the whole property,

We look at properties that have been on market long time with no showings than it seems that as soon as we do, a glut of people are drawn to the property which impacts negotiations for an even more reduced price (REOs)
Being in my unique position, I need your opinion. What is the best course for us? Approach houses for sale/foreclosures with this RTO idea? Can I approach rentals with the RTO idea? I ask because I’m not seeing RTO properties that are the right town, size, etc. to accommodate my family.

Linda says:

Thank you for this helpful information.
I have a question. We entered a lease purchase
agreement in Nov made the $5000 deposit but we don’t move in until Dec
But the owner asked for Dec rent.
Isn’t the rent due in January?

Stephanie Colestock says:

If you’re moving in December, the rent for December is indeed due before your move-in. This, of course, assumes that your $5,000 payment was strictly for a security deposit and didn’t already include the first month’s rent.

Alissa says:

I moved into a rent to own home 7 months ago, and what a disaster. I have pry made all of these mistakes! It is an option to buy the home, and since it was an option I took it more in mind as a rental. I would have hired an inspector if I knew any of this. If I was going to purchase, then I would have had an inspector come in. I came thru and inspected it myself. It is a 3 bedroom bungalow house. It was forclosed for a year and a half before the broker had purchased it. The whole first floor they repainted, put new carpeting and tiled the kitchen so it looked pretty good. The upstairs is carpeted also. It did need some work from what I could see, but they we’re not any major things. New heating system and windows. They basically slapped this house together cheaply so someone would come in and take it. 1 year old roof on house, siding could use redone, but like I said the major things I saw we’re done. 1 car garage, not the best but not the worst either – I have seen worse. Basement not finished, but did not appear to have leaks, mold or anything else was clean. I signed the lease, started moving a couple things in and cleaning very good as I am OCD about a clean house. I noticed in one tiny area upstairs that they had not recarpeted – it was in the closet and there was no lighting, a ton of mouse droppings and urine on this old carpet. I called the guy ASASP and said what the heck you got me in a mouse infested house? He said no I was with the workers everyday there is no mouse droppings so I sent a picture to his phone. My youngest daughter has asthma, first 2 weeks there she could not breath we got an air purifier for her room. I had to get her on meds cuz she was having panic attacks at night when she would go to sleep that she would quit breathing it was so bad. I moved later in the year so we were using the heat and I pulled some of the heating system apart where the filter goes – ton of mouse crap. So that is blowing thru our vents. I have been sick, my daughter has been ill. Then within 2nd month I notice the walls on back of the house in basement in spots are just leaking water. There is such a bad foundation problem. So I had a construction person come over and we start looking up towards the ceiling – where the sides and the ceiling meet – they straight painted the walls to just cover the issue. within 7 months now, every wall along the back of the house is showing this water issue. My kitchen tile is bowing – bathroom wall is bowing. The garage had some rotten wood and it leaks really bad, they put a big tarp over it which within a couple of weeks was ripping and falling down. I started doing work that needed done and putting money into the house – but seeing all of this I have seized everything. I got screwed bad, and to top it off it’s a health issue and things we’re covered up by the Landlord.

Aggie says:

Wow, that sounds like a mess. How long is your lease?

Diana says:

Why can’t you ask for the repairs to be completed by the landlord (look up how to properly and legally do that in your state through the bar Association), and do the proper paperwork? Let them know you will be reporting the conditions to the health Department and County Building Inspector. I was in a Lease Option several years ago. had many major issues unearthed while leasing, and I contacted the City, they came and inspected and agreed with the dangers and found several other issues I had not, and sent a letter to the owner/seller demanding the repairs be made within 30 days or a warrant for their arrest would be issued. of course, I had deposited my rent into court as well, and followed all the legalities of doing so, with proper timelines. best of luck to you.

Laura says:

Hi Rob – Came across this article of yours which is very informative in many ways in regards to RTO and I am in the process of RTO my townhouse and was wondering id you could help me with a few questions.
The potential renters are putting $5000 down and their 1st months rent is included within this payment. And I am giving them 300 credit towards the purchase. So i did not plan on putting any of the payments in any escrow and planned on using the money they pay to help with my house I purchased and was just going to keep track of all payments so as to show everything they are paying where it is being applied to rent and credits towards the purchase. So is this okay the way I am doing this? They are RTO for 3 years and the place was totally remodeled so nothing needs to be update so they are buying as is and carrying renters insurance as I am carrying dwelling insurance plus paying the taxes. So I am just wondering about the taxes on what I can totally have to claim without owing a bunch of taxes in the end of when they purchase it for the set price. Do I just claim all of the entire payments for taxes at the end of each year so then there are no taxes on this income when the purchase is processed? I’ve been researching over and over and I feel somewhat more confused in regards to all the taxes involved in this RTO process. Any help would be greatly appreciated.

kylas says:

I am currently looking at options to buy a home (first time) and lease with option to purchase/rent to own seems like the best fit for our current situation. I also have to move by April 2018 so I am trying to get this process started as soon as possible.

I’ve been finding so much conflicting info online about LTO/RTO. This article seemed very helpful until I started reading all the comments, now I’m even more confused.

Who is the best and first person I should contact in regards to RTO/LTO?? I have heard some people say contact a realtor, contact a broker, contact a realtor that specializes in RTO/LTO because many sellers are not interested in these kinds of deals, contact a real estate lawyer. I am also hearing make sure you have 3 contract others say 2 contracts, some say get an inspector, don’t get an inspector….. it’s all a lot of info to take in.

Like I said, I don’t have that much time so I want to know who would be the best person to reach out to in order to start this process? I want someone knowledgeable, that has been able to complete LTO/RTO successfully before and can make sure it is a win/win for both myself and the seller. PLEASE HELP! ANY AND ALL HELP IS APPRECIATED!

Looking to move to Brevard County in FL in April/May 2018.

Rex says:

My understanding is that it is ILLEGAL for a seller of a home to give money to a buyer of the home for the down payment. That would be a gift. Simply giving the buyer back the rent credit and option money toward the down payment is doing just that – “gifting” the buyer the down payment. Gifted funds and sources of those funds are STRICTLY regulated. I can see agreeing to pay the buyer’s closing costs up to the amount of the credits and option fee. Lowering the sales price by the amount of the credits and fee will lower the appraisal value (I have seen this happen), so that is risky. Your thoughts?_

Dee says:

You’re not giving them anything. The amount is being applied to the price of the house, and only if they exercise their option. Not only that, the rent credits and option fee are already included in the price of the house anyway.

louis nardozi says:

I have an answer for nearly every question asked in this forum.
What does the contract say? The lawn isn’t mowed, what does the contract say about that? There’s no insulation and it’s cold inside, was the move-in inspection signed and did it say the house was OK? Well, tough noogies, you get to buy the insulation. I could do this all day, but I think you can all understand now that you need to read the contract before you sign, or you might just get screwed. Or, you’ll think you got screwed when it was all plainly written out in the contract.

Liz says:

My boyfriend and I are considering a LTO on a property in Teton Valley in Idaho. It is a newly remodeled double wide on half an acre. We have been asked to do a $16,500 down payment, and pay $2,100 / mo with $1,860 of that going towards principle. The total cost of the home is $325k; so at the end of the lease agreement we will have roughly $90k paid off. After reading these it seems like we are paying way more upfront and monthly- but also seems to have more going towards principle than the above mentioned scenarios. The contract hasn’t been written up yet, but I will make sure to go through it. Does this seem like a plausible contract? I realize this is an old post.

Mindi says:

Did you go through with this purchase, I as well looking at doing the same thing!

Thank you

Kathryn says:

$325k on a double wide seems like a poor investment. Mobile homes unlike a real home on a foundation will depreciate in value. Unless u were buying a lot of land that it sits on. But I think u said it was on a half acre? Is this normal for Idaho?

real-estate says:

A very informative article about real estate investment! People who wanted to invest in real estate must learn the basics in order to understand that it is possible to get high revenue from this.

Randy Stuckel says:

how do you find the properties without having to give a dollar for that crappy advertisement at the end of rent-to-own when they say they got all the listings is there a way around that?

Stacy Spencer says:

Thank you, thank you and thank you again for this knowledge, as I am close to ready to purchase (about a year) but cannot stand the community where I rent so I am considering rent to own for the time being. Did not see the info on the $8,000 tax credit. Where might I find?

Ando says:

Hi Rob, I have a question that I hope you can answer. I own a property that I currently rent. The tenant wants to renew with a RTO approach. We agree the property is worth $200,000. She wants to contribute an extra $2,000 per month over the next year and then purchase it. Thus, she will have paid $24,000 into escrow. My question is, from a legal point of view (I’m in California), can I sell her the property now for $176,000 and I simply keep the $24,000 of the escrow money (which I would report as rental income)? Or is it a legal requirement that the $24,00 be APPLIED toward the actual purchase of the property? Thanks!

RealtorShelly says:

Buyer may need that 24k for down payment on 200k in order to qualify for mortgage, and it would eliminate pmi for them. If I were their agent, I would advise them against that.

Lucian Ford says:

I live in Virginia and my fiance and I just entered a rent to own agreement on a house that is just falling apart. There was no disclosure about the subpar conditons of the property. This house would never pass inspection. Is it against the law to list a property strictly as rent to own because it doesn’t require an inspection and it is quit apparent that it wouldn’t pass? Also is the a standard a house must meet to be advertised, as in at least inhabitable.